Rocket Lab's New $5.6 Billion Opportunity

The stock market is in turmoil. Investors are worried about the Trump administration's tariffs on international goods and how they will affect corporate profitability. The tariffs are widespread and affect nearly every sector of the market. There is one sector, however, that could potentially feel minimal tariff impact: the space economy. As a national security priority and led by homegrown champions such as SpaceX, private rocket launching and space services are largely built and performed in the United States.

Consumer demand also isn't a real factor when it comes to rocket flight companies. Demand is likely to be there through strong and weak economic environments, especially from the U.S. government. It is no surprise then to see Rocket Lab USA (NASDAQ: RKLB) approved to compete for a $5.6 billion launch contract from the United States Space Force.

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The project, which has a five-year ordering period through 2029, is for high-priority national security missions. Here's what it could mean for Rocket Lab stock going forward.

A big bet on the Neutron rocket

The National Security Space Launch (NSSL) program is going through its procurement period, meaning the U.S. government is asking rocket launch contractors to propose bids for the service. On March 27, Rocket Lab announced it was approved to begin competing for these launch bids. This does not mean the company has won any contracts, but it has the privilege of building a proposal that the U.S. government may pick. Competitors for the project include SpaceX and Blue Origin, although it isn't an exclusive contract to win.

At $5.6 billion, this is a huge contract for a company the size of Rocket Lab. It will have a minimum of 30 missions with a potential expansion through 2034. Knowing how government contracts work, this $5.6 billion figure could be raised at points over the next few years. Generating just $436 million in revenue last year, Rocket Lab sees this contract as a huge opportunity.

There's one problem, however: Rocket Lab has still not fully built the rocket that would be used on these missions. Named the Neutron, the medium-payload rocket system will be going through testing in 2025 and will hopefully start consistently launching for commercial customers within the next few years. Rocket Lab is banking not only money, but also time and reputation on the Neutron rocket. If the company can get a reliable Neutron rocket to market, it will open up opportunities to win money from this giant NSSL contract, among other potential deals with other partners, both governmental and private.

Build it, and the money will come

An investor in Rocket Lab can get bogged down in the complications of this business, with the many different product lines, customer segments, and potential contracts to win. I think it is easiest to simplify things. One factor matters for Rocket Lab above all else: Getting a working Neutron rocket flying payloads for customers.

At the end of the day, nothing else matters. SpaceX is the leading player in the sector by virtue of being the only player, meaning there is room for another space flight start-up to win some market share. If Rocket Lab builds and successfully launches the Neutron, the money will show up, likely pouring out from government and commercial contracts, as Rocket Lab will be one of two rocket launch companies to reliably and consistently launch payloads for commercial customers (SpaceX being the other one).

Rocket Lab has proven it can win contracts with its small Electron rocket, and now the Neutron is the next step. If it keeps building its product pipeline, Rocket Lab could be well on its way to reaching SpaceX's reported $350 billion market valuation. For reference, Rocket Lab has a market cap of just $8 billion.

Data by YCharts.

Should you buy Rocket Lab stock?

On its trailing numbers, Rocket Lab stock looks overvalued. The stock has a market cap of $8 billion on $436 million in revenue, or a price-to-sales ratio (P/S) of 18.4. This is for a low-margin business that is currently unprofitable and capital-intensive. There is no way to argue that Rocket Lab stock is a buy based on its trailing financial figures.

Long-term investing is all about making educated estimates about future performance. Rocket Lab has a path to 10x its revenue over the next decade while starting to generate healthy profits for shareholders. This is a high-risk bet, but also one with a high reward potential if things take off.

So how should one invest in Rocket Lab? If you are attracted to this stock and want to buy it for your portfolio, make it a small position at cost. That way, if things go south, it doesn't destroy too much wealth. But if it works out and becomes the next SpaceX, it will become a bigger and bigger position in your portfolio over time.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Rocket Lab USA. The Motley Fool has a disclosure policy.